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Cheating Opportunities

This note was originally published at 8am on July 26, 2013 for Hedgeye subscribers.

“Forces might make it easy for group-based processes to turn collaborations into cheating opportunities.”

-Dan Ariely


There’s some serious irony that I’m finishing up my behavioral economics review of Dan Ariely’s The (Honest) Truth About Dishonesty while our profession gets its reputation tarred and feathered by the fun cops.


I call it our profession, because it is. We are all responsible for self-policing this Street. For too long we have allowed our compensation structures to cloud our definition of grey. Leadership principles are black and white. It’s time to champion transparency and accountability.


No, it’s not easy to write about this. I think we all have former friends who have lied to us. Accepting that isn’t easy either. Social groups affect us in many ways that we are too human to understand.


Ariely reminds us that “when cheaters are part of our social group, we identify with that person and, as a consequence, feel that cheating is more socially acceptable. But when the person cheating is an outsider, it is harder to justify the misbehavior, and we become more ethical in our desire to distance ourselves from that immoral person and from that other out-group.”


“… results show how crucial other people are in defining acceptable boundaries for our own behavior, including cheating. As long as we see other members of our own social groups behaving in ways that are outside the acceptable range, it’s likely that we too will recalibrate our own internal moral compass and adopt their behavior…” (pages 206-207).


Leadership isn’t how much money you make; it’s your opportunity to make a difference.


Back to the Global Macro Grind


The Russell 2000 clocked another all-time closing high yesterday of 1054 (+24.1% YTD) as mostly every growth stock that beats toned down expectations rips to new YTD highs. Slow growth investor T-Bonds were down (again). This remains a growth investor’s market.


Growth, growth, growth – if you can find it, buy it – that’s not just a progressive message that stands in stark contrast to the fear-mongering one that is getting pummeled (VIX -29% YTD), it’s a good way to live your life. In order to grow, you need to embrace change.


What’s interesting about being long growth is that not all “growth” investors have actually agreed with it, yet. That said, it’s important to remember that we’re all storytellers – and the market doesn’t care about our own individual versions of the story.


Here’s the non-fictional account of what we call growth “Style Factors” for 2013 YTD:

  1. Top 25% EPS Growth Stocks (SP500) = +23.8% YTD
  2. Low Dividend Yield (growth) Stocks = +26.4% YTD
  3. High Short Interest Stocks = +22.6% YTD

In other words, if you are long high-beta stocks that A) look “expensive” B) have high short interest and C) deliver better than “expected” growth results – boom! Non-cheater alpha is yours to keep.


Not only are non-obvious growth Style Factors beating the SP500’s YTD return of +18.5%, so is growth as a sector-style within the SP500:

  1. Consumer Discretionary Sector ETF (XLY) = +25.1% YTD
  2. Utilities Sector ETF (XLU) = +12.3% YTD

That’s a massive (and widening) performance spread that looks a lot like being long US Stocks vs US Treasury Bonds.


And there’s more alpha where that came from. Whether it was Visa (V), Facebook (FB), or long-time Hedgeye favorite Starbucks (SBUX) this week, Mr. Market is telling you that you don’t need to cheat to win in this business. You need to pay up for the growth that you can find.


While this doesn’t always make sense to people until they make the amount of mistakes I have, the other side of being long this growth rip is shorting “value” stocks that look “cheap” (if you use the wrong numbers).


That’s CAT.


So all in, what we have here is an opportunity to separate the pretenders from the pros. This is the new old school - roll up your sleeves and do your own work. No need for insider information. Just have the confidence and humility to let Mr. Market tell you all you need to know.


Math is our edge. It’s black and white. The opportunity to capitalize on leadership principles and a repeatable process has never been so bright.


Our immediate-term Risk Ranges are now:


10yr Yield 2.47-2.65%

SPX 1675-1700

VIX 11.82-13.37

USD 81.54-82.57

Yen 98.41-100.78

Gold 1244-1359


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Cheating Opportunities - Chart of the Day


Cheating Opportunities - Virtual Portfolio

Keith's Thoughts on Big Move In Japan

The big move in Japan this week definitely caught me off guard.


Now the question becomes: Are we are past the maximum, short-term "Yen short/Nikkei long" pain? At 96.16, Yen (vs USD) is 3.1 standard deviations oversold in my model. No, that doesn’t happen very often.


Meanwhile, the Nikkei is holding TREND support of 13,445. So yes, I am tempted to buy back the DXJ on that. Waiting on the signal.


Keith's Thoughts on Big Move In Japan - Nikkei   FXY


(Editor's note: This post is a brief excerpt from Hedgeye CEO Keith McCullough's morning research. For more information on how you can sign up and start harnessing the Hedgeye team's award-winning, proprietary research, please click here.)

US Births: Recovery Intact

Takeaway: We continue to expect accelerating growth in US Births in 2Q13/3Q13, but softness in 4Q13/1Q14. Long-term Recovery Thesis remain intact

This note was originally published July 17, 2013 at 15:36 in Healthcare

US Births: Recovery Intact - preggo


We recently updated our birth regression model for 2Q13 and 3Q13.  Our model continues to call for accelerating growth in the near-term given the trajectory of the underlying factors that drive our model.  Below we discuss the drivers of that forecast as well as recent developments related to our thesis

  1. Women’s employment (20-34 YOA) ACCELERATING: One of our better leading indicators.  Growth has accelerated through most of 2012 and suggests accelerating growth through 3Q13
  2. PKI Human Health Organic Growth ACCELERATING: Product portfolio focuses primarily prenatal and neonatal testing, and has been a strong lead for US Births.  Calling for continued growth through 2Q13.
  3. Household Formation NEUTRAL: Complements of our Financials Team, has been a good coincident read on birth trends.  Although improving sequentially in 2Q13, the 2-yr average (the better read) calls for a slowdown in 2Q13
  4. Home Prices ACCELERATING: The implication here is rising prices are a signal for growing demand for housing.  Has been a surprisingly strong read into US Births.  Current trajectory suggests improvement into 2Q13
  5. DEST 2Q13 SS Sales ACCELERATING: Decent overlay with US Births.  Preannounced accelerating SS sales growth for 2Q13 (the highest the company has seen since 2006), suggesting accelerating growth for 2Q13
  6. HCA/THC 2Q13 Admission Trends NEUTRAL/ACCELERATING: Both companies SS admissions trends are pointing to steady to moderately improving trends in 2Q13.  Note US births represent 25% of hospital inpatient volumes
  7. Hedgeye OB/GYN Survey (July 2013) DECLINING: Our survey asked respondents about the y/y trend in June,  which we created an index off of (base 50). The data suggests both births and pregnancies declined in June.  We will be running the survey again in August.
  8. CSFB Survey NEUTRAL: Anecdotal callout from a competitor’s survey, suggests births were flat y/y in 2Q13.   



We do not have as strong a read longer-terms since many of the macro factors we track are coincident indicators.  Our two longer-term reads our Women’s Employment and PKI Human Health, which point to slowing, potentially negative trend in 4Q13/1Q13

  1. Women’s employment (20-34 YOA) DECELERATING: Suggests a moderating, but positive trend for births into 4Q13/1Q14
  2. PKI Human Health Organic Growth DECELERATING: Suggests moderating, if not negative, growth in 3Q13/4Q14.  We do note the that 1Q13 results for PKI may be negatively skewed due to externalities (working days/weather)



One of the major tenets of our forecast is what we refer to as the Deferred Birth Opportunity, which is the number of pregnancies/births that were delayed for economic reasons because of the Great Recession.  Note that the size of primary birth demographic (women aged 20-34) was not only growing, but experienced accelerating growth from 2007-2012, alongside a cumulative decline of 9% in US Births during that period. 


Ultimately we see some percentage of that Deferred Birth Opportunity coming back into the system; particularly among first-time mothers, which annually represent 40% of US Births.  We estimate that between 1.0 and 1.5 million births have been deferred during the Great Recession.  Given the currently deflated base of US births (2012 was lowest annual nubmer since 2000), the growth potential could be significant. 


Charts below.  Feel free to contact us for more detail, underlying data, or with questions. 



Thomas W. Tobin





Hesham Shaaban, CFA




US Births: Recovery Intact - tt1

US Births: Recovery Intact - Births   vs. Women s Employment 2Q13

US Births: Recovery Intact - Births   vs. PKI 2Q13

US Births: Recovery Intact - Births   vs. Household Formation 2Q13

US Births: Recovery Intact - Births   vs. FHFA Home Price Index 2Q13

US Births: Recovery Intact - Births   vs. DEST 2 yr

US Births: Recovery Intact - Survey   OB   June Preg Births

US Births: Recovery Intact - Births   vs. Female pop  1975

US Births: Recovery Intact - Births   Deferred opp growth


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Despite relatively strong labor market data and the Bloomberg Consumer Comfort Index rising to a five-year high, top line trends in the restaurant industry remain choppy, at best.


First, Knapp reported weak casual dining sales and traffic trends for July, and now, underlying trends in the July sales numbers reported by MCD confirm that the company continues to struggle amidst a difficult macro and increasingly competitive environment.


This morning, MCD reported July system-wide and global same-store sales growth of +1.6% and +0.7%, respectively.  While these results appear positive relative to expectations, the two-year average trend for global same-store sales was a mere +0.4%, representing a sequential decline of -230bps from June.  Perhaps more importantly, we believe that the current level of system-wide sales growth is below what the company must generate in order to hit estimates for the quarter.



Segment Breakdown


While expectations were for flat July same-store sales growth in the U.S., the region surprised to the upside by increasing +1.6%.  The two-year average, however, moved lower by -60 bps sequentially to +0.8%.


Europe same-store sales disappointed, contracting -1.9% versus expectations of +0.1% growth in the region.  On a two-year average basis, Europe sales moved lower by -390 bps sequentially to -1.3%.


The APMEA segment continues to struggle, posting same-store sales of -1.9% versus expectations of -0.7%.  And, on a two-year average basis, the region fell -400 bps sequentially to -1.7%.


In aggregate, McDonald’s July comparable sales numbers were uninspiring and consistent with our bearish thesis on the company.  Rapidly decelerating sales trends now suggest, as we have been, that management must respond with a viable plan to improve operational efficiencies and spur long-term, sustainable sales growth.







Howard Penney

Managing Director


DF – Trading A Leg Down On Earnings Outlook

DF reported Q2 2013 results today with a $0.01 miss on EPS and revenue below expectations ($2.23B vs $2.25B). The company cited a challenging environment in which milk volumes appear softer than previously estimated, and flagged that Q3 volumes should be the most challenged in the year. This gives us pause on buying the stock on today’s pullback that broke its trade line of $10.98. Our quantitative levels suggest buying closer to our intermediate term TREND price level of support at $9.81.


DF – Trading A Leg Down On Earnings Outlook - zz. df


DF milk volumes were down -6% in Q2 year-over-year (vs industry milk down -2.1%) and the company’s U.S. market share dropped to 36.4% in the quarter versus 37.8% in Q1.  The company expects mid single digit declines in milk in 2013, and on the call narrowed its FY adjusted diluted EPS guidance to $0.47 to $0.53 versus a prior $0.47 to $0.55.


Despite the negative print, and subdued outlook for Q3, DF, having spun off 67% of Whitewave (WWAV) in May 2013 and reaped $589MM through the sale of its remaining stake of WWAV in July, has bolstered its financial position and is in a strong cash position should it want to make an acquisition in 2H; certainly deployment of this cash could awaken animal spirits on the long side.


The company trades at a P/E of 14.4x versus a peer average of 17.2X and EV/EBITDA of 10.6x versus 11.6x. Despite the discount to the group, we are not buyers here and now on today’s pull back. 


Matthew Hedrick

Senior Analyst


Takeaway: We wouldn't be surprised to see the elusive 2-handle on the seasonally-adjusted initial jobless claims reading by late 1Q14.

U.S. labor market data continues to come up roses as the most recent non-seasonally adjusted initial jobless claims came in 10.5% lower than a year ago. That's a slight improvement vs. the previous week, which saw a 10.1% improvement, and is a bit ahead of the average for the last 12 weeks, which is -8.8%.




Giving exception to the single anomalous data-point 3 weeks ago (-0.2%), we find the average over the last 12 weeks has been a year-over-year improvement of 9.7%, extraordinary for this point in the cycle. This rate of improvement is understated by the seasonally-adjusted data, which also looks quite good. Based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we think the SA number, with no underlying fundamental improvement, will shift from 333k to around 305-310k.


There is, however, clear underlying fundamental improvement, so we wouldn't be surprised to see a 2-handle on the SA initial jobless claims reading by late 1Q14. For perspective on just how strong that is, historically, since 1975 we've observed 2-handles in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,014 weeks have seen sub-300,000 SA initial claims weekly prints. 


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